Posted on 01/30/2021 7:09:35 AM PST by RinaseaofDs
I'm assuming you mean the conspiracy stories where the big banks like JPM are massively short gold and silver, depressing the price? If so, you should know that 99.99% percent of those short positions are actually from precious metal miners who use the big banks to go short in the futures markets for them. The metals producers will always be short because they are delivering physical metal against those short contracts. Physical metals buyers are long, and take delivery from the miners (who are short) at contract expiration.
Don't be a sucker of the gold bug sites telling you that the price of their over priced coins they sold you will one day skyrocket when the big evil banks lose control of those short positions, getting squeezed out.
The shorted shares were loaned from the "float" of shares: shares that exist in-between actual ownership of a shareholder. Our markets work because a third party (market-maker or clearinghouse) serves as a middle man to make trades at or near market price happen even if an actual buyer/seller pair might not exist at the time of the transaction. The middle man holds/tracks a pool of shares to facilitate buys and replenishes the pool on sales. The pool is generally much smaller than the total stock issued by a company (and mostly off the market in the hands of actual shareholders.)
Generally naked shorts are facilitated by selling call options: a promise to deliver shares at a fixed price to the contract buyer by a specific date regardless of the market price. The contract buyer is betting the stock will rise; the seller is betting the stock will fall. The sale of the contract is revenue to the contract seller. The Short-sale-bet made by the seller (Melvin/Citadel) is that the stock price will decline over the term of the contract so that at expiration, the buyer of the contract will not want to take delivery of the shares. If indeed the market price of the shares is less than the call option contract price of the shares, it's cheaper to just buy shares on the open market. So, the contract expires and the contract seller (Melvin/Citadel) keeps that contract fee as profit ... and no actual share are traded.
In this case, it seems clear that there was an INTENT to create massive fear in the market for GME stock by setting up a MASSIVE short position on the stock. Melvin ties up a good portion of the float with short sale call options. Once word of this got out and folks started buying the stock, the float dried up as open market purchases were settled. It's hard to work out the exact timing of things, but I suspect the 140%-of-float number comes from the dwindling of the float pool as buying activity outstripped selling activity ... and Melvin was STUCK in its contract positions. It was on the hook for contracts that promised to deliver shares at prices that were BELOW the market price and trending even higher ... so they tried buying to cover some of their obligations ... which shrank the float even more ... and they had to pay even higher prices to encourage anyone to sell! They faced a bankruptcy event ... and should have failed: they took a big risk and got caught. Stupid should hurt.
Ironically, not a bit of this is illegal ... some might say massive short selling is unethical, but so far it's not illegal.
What this episode exposed was the ugly side of market risk. BOTH sides in this saga took massive risk: short sellers took the risk that unless the market price of the stock declined, they would lose; GME buyers took the risk that unless the market price rose, they would lose. Both sides were betting on herd behavior to either profit from panic selling (real shareholders selling shares before the price went even lower)or panic buying (short sellers buying to cover their short contract with real shares before the price went even higher). Both sides dug in, but the retail buyers has TWO significant advantages:
1. The Market is REQUIRED to settle legitimate stock trades (buys) ... regardless of the position of options contracts betting on stock future prices.
2. The short sellers had already dug themselves into a big hole from which they could not exit until their contracts expired.
In short, Melvin dug themselves into a fixed position and their adversary (the retail buyers) saw an opportunity to use that position to make a profit by bidding UP the stock with a squeeze ... also quite legal. The REAL crime here is NOT by Melvin nor the Retail buyers: It is the corrupt connections in the trading systems that PROTECTED the insiders and SCREWED the retail buyers. The ONLY fair actions here, if indeed certain structural components of the broader market workings were at risk would to been to either allow the blood bath to happen, or FREEZE ALL trading activity in GME et.al., let Melvin/Citadel fail after the contracts expired, and let the Retail Buyers take their lumps after the short squeeze pressure was eliminated. Like I said, stupid should hurt. Unless the Melvin's of the world have to face their consequences of their risky behavior, they'll keep doing it.
Damn. I used webull.
But I forgot my place. I am little people.
For a guy who’s “no expert”, that’s one heck of a succinct analysis.
Bravo!
Yep, it was once done with paper checks, when electronics caught up, they switched to credit cards, when the card catchers got smarter, they moved into phishing for individual accounts and now hedge funds are shorting more than the number of stocks than are in existence, while waiting for a gummint bailout {once they got nailed}.
The bail out will come, and it shouldn't surprise anyone...masks for thee but not for me.
The Citadel is so well connected that it is not possible they don't get saved by the gummint.
The only thing I would disagree with in your post is the fact that the Reddit Mob was exploiting this to make money. I think it is pretty clear now that this has changed to simply sticking it to the hedgies, and I don’t have a problem with that because it has shown a bright light on the total corruption of wallstreet and illuminated it for mainstreet. Until the masses see how everything is corrupt, nothing will change for the better. The Reddit Mob has to know they are going to lose money on this eventually cuz you can’t bid up a stock 10 20 50 100fold over its traditional price and expect it to stay there. But I suspect these are paper profits for most of them, and their starting capital was small...probably their WuFlu stimulus check, which they viewed as not really their’ money to begin with so they could afford to use it to stick it to someone as ‘justice’. Not saying that is right or wrong because when the world is run by fraud, you have to expect the masses to use fraud when the system was gamed against the masses with the very same fraud.
I definitely agree that all parties need to be held to moral hazard. Like I said, I think the Reddit Mob really has already figured this money is lost. It’s the hedgies and wallstreet that doesn’t want to lose a dime. Same as in 2008 which is why we had ‘too big to fail’. Moral hazard has to come back. Rule of Law. Equal protection and EQUAL OPPORTUNITY under the law. Unfortunately, with everything being corrupted, I don’t think we will return to this until the corrupt system is forced to collapse. The Powers That Be have too much of a vested interest in letting the fraud that enriches them be corrected without massive pain for everyone. There in lies the problem.
If those are cash settled options, your whole theory blows up sky high. Did you consider that?
“There are no fees for trading at Ameritrade. Wonder how they’ll like that. Be a lot of overhead and accounting on their part.”
All the work is done by computers.
Mailing confirmations is the only costly part and I have no idea if the transactions would be consolidated for mailing purposes.
I grew up in an era when stocks normally got traded in multiples of 100. My father bought his children odd lots from time to time. My father traded enough that his broker didn’t mind.
And in 99% of trade accounts today that is an email, i.e. no postage expense incurred.
“This way they can drive any publicly traded business to bankruptcy”
Once the company issues shares, shareholders are mainly a legacy issue. If there’s money to pay a dividend, that’s good, if not, that’s OK.
Paying the executives is the most important concern.
I believe that if the short ratio falls below 100%, a high short price can collapse.
I also believe that due to uncertainty about the ratio and the possibility of side and time extension deals, a high short price can collapse even when the short ratio actually above 100%.
I’m not an expert, so your money, your risk.
Esp w/ Yellen’s $800K gig.
As I understand it these firms are required to maintain certain reserves and the kind of trading we're seeing is stressing their capital.
At least that was the excuse the CEO of Robinhood gave for temporarily suspending buying until they got another capital infusion from their investors.
We don't disagree at all. BOTH side were exploiting legal and available market mechanisms to make money. BOTH sides made risky bets. BOTH sides were exposed to losing money.
Capital Markets are inherently risky. Derivatives are riskier than core securities. Risk carries a premium because it risky ... a tautology, but often forgotten or dismissed. Big gains stem from big risk ... big risk also brings big loss.
I don't mean to be preachy, but everyone in the market at any level is putting their capital as some risk ... there are no guarantees. A so-called "Redit Mob" is no different than a MorningStar forum opining about how a like-minded group of market players might want to pool capital to try to increase their chance of winning a risky bet.
Naked short selling (especially by folks who advertise and discuss their bearish outlooks on a security in market press is no different. so-called "market experts" are far more wrong than they are ever right.
Not at all. Even a cash-settled option contract is pegged to the cost of the underlying asset at expiration. If the underlying security is significantly above the strike price, then the seller of the contract is out the difference and the buyer of the contract wins. The underlying bets are the same, the underlying risks are similar.
The only real difference is that if indeed the option results in the delivery of the underlying asset, then the seller MUST purchase the asset for ultimate delivery to the buyer of the contract at whatever price is required to obtain the asset. This "spot" price could be much higher than any average, nominal, or close price of an asset at the time of contract expiration. To limit such losses, contract sellers standing to lose start buying early to avoid the rush ... that pushes up prices and decreases float.
Normally, Cash-settled options are used where the underling asset is not an easily transferred asset (like an index future ... there is no index asset to transfer and no real ownership of the index price ... not to be confused with an index fund which is a equity security that can be owned). For ordinary assets like publicly traded shares of stock, the asset is indeed delivered.
My "whole theory" is simply this: markets are risky, some market plays can be very risky. If you are going to engage in risky behavior, you must suffer the consequences of losing just at you would enjoy the benefits of winning. Nothing illegal happened in the underlying transactions ... the problem occurred when the so-called "system" intervened to protect some players at the expense of others. That is just plain crony-ism at its worst.
I meant your whole theory about getting squeezed to deliver shares would go sky high.
Talk to me about those WITHOUT margin accounts: I buy a stack and actual cash leaves my account. That money automatically underpins the trade regardless of the time it takes to settle. How come non-margin account holders are prevented from buying?
And by the exact same mechanism, SELLING has far more inherent risk because unless the buy that clears the sell order comes from a non-margin account, the very real likelihood the buyer can’t do pay is much greater. Literally infinitely so if the buyer is the counter party that shorted the stock in the first place!
It’s absurdly indefensible for Robinhood or any other broker or clearinghouse to ban buying from non-margin accounts for the reason of liquidity risk.
The ONLY reason to ban buying but not selling is to drive the stock down to a level that provides the shorting party a chance to reload their shorts at a more favorable price.
Full stop.
So, that makes the buying ban even more outrageous because it artificially crashes the value of the stock you are holding AND unfairly allows the criminal who shorted the stock a chance to recover.
Instead of a thumb, Robinhood is putting their entire weight on the scale to cheat GME holders.
The hedges can’t at this point. In fact, tomorrow Asia can bid GME up even higher since 1/31 is a Monday for them. The shorts, in a normal situation, would face literally unlimited downside risk.
However, this is 2021 and you can steal the US presidency if you want. I guess we’ll see what happens on 2/1.
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